As of 6/7/10,I have not received an answer to my question,to wit: if a short-sale transaction is approved,and the Lender agrees,to accept the short pay as"paid in full. I would assume that the Lender would then issue a 1099-C. But, how would the IRS treat the debt forgiveness(ie: as a gift)thus triggering a taxable event for the homeowner?
2 Answers from Attorneys
There is an IRS regulation that states that when debt is 'forgiven', then the amount that was forgiven will be treated as income for income tax purposes. If you think about it, you received that amount but did not have to give it 'back'. You received the benefit of it.
Hello:
You might want to check out this link:
http://taxes.about.com/od/income/qt/canceled_debt.htm
You should also consult with your CPA or whomever does your taxes.
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